Blogs Archives - Page 3 of 6 - Lindeman Reports

Posted on December 20, 2021December 20, 2021 by John Lindeman

Putting your eggs in one basket

If we were completely confident about the performance of our investments, there would be no point in spreading them around to avoid risk. We would simply put all our eggs in one basket, and invest where the results were going to be the best.

The only reason that investors balance their portfolios is because they aren’t confident about the outcomes, and so they diversify to minimise any potential risk. The logic is that if one of their property investments falters, good performance in the others will still give them an acceptable overall result.

However, spreading your investments around by choosing different types of properties, different locations or even buying in different States doesn’t necessarily cut any potential for loss, because all the areas or types of property or types of property you have chosen still be at risk.

Let’s look at some of the most common strategies investors use to minimise their exposure to risk and see which of them makes the most sense.

Spreading properties between capital cities and regional areas

Australia’s regional property markets do occasionally outperform capital cities, but their performance is far more volatile This is because housing demand is often limited to one or two sources, such as mining or tourism, or when large numbers of buyers periodically relocate to regional areas.

This means that if there is strong evidence that a particular regional or rural market is about to boom, it will still be important for you to identify the cause, so that you can “time” the right moment to invest and anticipate when the growth is about to end.

Diversifying in different States

Some investors believe they can minimise their risk by purchasing their properties in several different States or Territories.

However, this can lead to a huge mistake being made if the properties are all located in the same type of market.

For example, you might diversify your portfolio across several States, but if they are all located in towns with a reliance on the same industry such as mining or tourism, then they are all still located in the same type of market, which means that you haven’t really balanced your risk at all.

Buying several different types of properties

Other investors diversify by purchasing different types of properties, such as houses, units, townhouses, duplexes and apartments.

Unfortunately this doesn’t reduce risk, because each of these types of property can perform differently, even in the same suburb.

Always invest in areas with the greatest potential housing demand

Irrespective of where you decide to invest, you need to look at the single most important fact about housing investment. The best investments will always be where the demand for housing is so great that it leads to housing shortages.

Strong rental demand delivers cash flow

Rental markets are far more volatile than owner-occupier markets, because the people who live in the dwellings don’t own them, while the investors who own them don’t live in them.

This volatility provides opportunity as well as risk.

Rental markets can offer you high positive cash flow, but also high risk if the rental demand slows down or the market is over developed with new dwellings being sold to investors.

Strong buyer demand delivers price growth

If you are seeking sustained capital growth without speculative risk, you can choose from first home buyer markets located in urban growth corridors and outer suburbs, upgrader areas situated in well-established upper socio-economic areas and downsizer locations located in attractive retiree destinations.

If you are certain that one type of market is about to boom, it makes sense to concentrate all your properties in that type of market.

The only diversification you might then make would be to minimise State land taxes and the impact of natural catastrophes such as floods, bushfires or cyclones.

This is why it is best to limit the diversification of your portfolio to those types of markets which have the best potential to provide the outcomes from property investment that you are looking for.

Posted on December 8, 2021December 8, 2021 by John Lindeman

Know the best time to buy, hold or sell

by John Lindeman

Every investor needs to know whether it’s the right time to buy, hold or sell their properties. While there are many numbers, statistics and indicators out there ready to help your decision making process, not all of them are accurate or reliable and some are even misleading.

Investors are bombarded by a seemingly endless array of information and advice about when to buy and whether to sell their properties. Because much of this is confusing and even inaccurate, property market expert John Lindeman reveals which stats can help you to make those critical buy, hold or sell decisions.

Published property data is results driven

Most of us rely on published housing data such as sales, sale prices, rents and rental yields when making buy, hold or sell decisions. In fact, many property prediction reports you can buy use these stats to make their forecasts. But, as the image shows, this information is already months old before we get access to it.

The current market could be very different from what the published indicators are showing, because they are based on past results. This is why analysts refer to them as ‘lagging indicators’.

While this information can show you what changes have recently taken place, it can’t tell you what is likely to occur next. For that we need ‘leading indicators’ – the numbers that forecast which way the property market in any suburb is moving.

Leading indicators point the way forward

You can track current market conditions and potential changes for houses or units in any suburb by using real time indicators such as asking prices and the number of properties listed for sale. You can get these from public listing sites and they will show you any emerging trends.

To demonstrate how they work, I have used the analogy of a plane flight where the aeroplane is our property market and the passengers are potential buyers and sellers.

The take off

As the plane prepares to take off, everyone on board is looking forward to their destination, enjoying a rest, catching up on some work during the flight or the in-flight entertainment.

A few optimists might even be looking forward to the in-flight food.

For the property market, this is when anticipation is growing. Buyers and sellers are keen, with both asking prices and listings rising.

Even though prices haven’t increased significantly, investors are confident that they soon will. It could even herald another boom, but it’s too early to be sure.

The inflight safety demonstration

We’re in the air. Uh oh! Thanks for reminding us that things can go wrong. Now we have to assume the crash position, see how to use oxygen masks and check where the emergency exits are.

We are even shown how to don life vests equipped with a light and whistle. It’s not comforting to know that disaster could strike – not comforting at all.

This occurs in the property market when doubts emerge, as buyers and sellers start to pull back, suddenly aware that markets do sometimes crash. Asking prices and listings fall as we brace for the worst, but will it occur, or will we land safely?

The crash

Unfortunately, a few flights do end in disaster, and this also sometimes occurs in property markets when demand collapses.

Everyone tries to sell and no one is buying. In other words, asking prices drop and listings rise dramatically. Property prices then fall, and many investors are ruined.

The safe landing

Luckily, virtually all flights end with a safe and happy landing. The passengers are now excitedly looking forward to their holiday, business meeting, catching up with friends and family, or simply arriving home again.

In the property market, such times herald the start of a real boom.

Asking prices are shooting up and it’s hard to find properties listed for sale because buyers are snapping up properties as soon as they go on the market.

How to time the turning points in any market

Because asking prices indicate the level of vendor confidence, while listings reveal buyer demand, we need to use them together to time those turning points when buyers and sellers are becoming confident or concerned and prices may be about to crash or boom.

Here’s John Lindeman’s guide on how to read any property market and find out what’s around the corner.

Posted on October 21, 2021October 21, 2021 by John Lindeman

Why past performance is no guide to the future

When it comes to partners, horses and football teams, past performance is often used as a guide to predict future performance. Many experts assure us that it’s the same with the property market, but this leads to a huge contradiction in exactly how past performance predicts the future.

Only buy in areas that have experienced good past growth

One group of experts claim that we should only buy properties in suburbs that have “stood the test of time”.

They say that high past performance offers us not only the greatest level of security, but the best prospects of continued price growth into the future. This is based purely on the expectation that such high past performance will continue into the future.

Seems logical, except that there are many suburbs and towns where housing markets have boomed for years, only to crash without warning. In fact, every boom has ended at some time, even if prices haven’t crashed.

The expectation that growth will continue in the future in some suburbs purely because it has in the past ignores the continual changes in population, purchasing power and affordability that occur in our all housing markets. High past performance is a good result for property owners in such areas, but is no guide to their future performance.

Only buy in areas that are overdue for growth

The other group of “past performance” experts use past performance in the opposite way. They rely on the absence of high past performance to pinpoint areas that are “overdue for growth”.

They identify areas where prices have not risen for years and then claim that such markets are due for a catch up to others where growth has occurred.

This ignores the fact that demand may have dropped in such areas, or maybe there have been huge housing developments causing oversupplies. It could be either or even both situations which keep prices subdued. Just because growth hasn’t occurred is no guarantee that this is about to change.

The issue for investors is that while both experts use past performance to justify their predictions, one group looks for areas with high past performance to find potential boom markets, while the other searches for areas with little or no past performance to do exactly the same.

The solution lies between these two extremes

The reason that some suburbs consistently outperform the overall market is because they are in well-established localities where no additional stock can be added. These tend to be the leafy inner or middle-distance suburbs of major capital cities where family homes are held for long periods of time, which results in market tightness and better long term performance.

Yet, even in such above average performing locations, there will still be one or two suburbs whose recent price growth has lagged behind the others, because buyer demand has temporarily fallen below the supply of properties for sale. This means that it will be possible to find a suburb where prices are overdue for growth, and purchase a bargain priced property in an area where prices will still perform well over time.

Posted on October 6, 2021October 21, 2021 by John Lindeman

Property market ponzi schemes

by John Lindeman

The unique feature of Ponzi schemes is that they use money collected from new investors to pay out existing investors. This means that when the number of new investors starts to fall, they can suddenly crash.

But be warned – they exist in our housing markets.

Property booms often start with a genuine rise in demand for housing, but sometimes they can turn into speculative bubbles driven by the expectation of higher prices, rather than being based on a genuine need for accommodation.

When this happens, we have the makings of a property market Ponzi. So who was Ponzi and why do such schemes ultimately crash?

Charles Ponzi started buying US post reply paid coupons in countries where they were cheap such as Italy, and then selling them in the USA where they were worth far more.

Using this simple strategy, he was able to promise investors returns of up to 50% and more, but the actual profits soon proved to be less than anticipated. So, Ponzi started using money from new investors to pay out earlier investors, and to attract more new investors offered even higher returns – up to 100%.

As long as the number of new investors stayed above the number of maturing investments, the scheme kept growing, with huge numbers of people taking part and enormous sums of money being invested.

Soon, however, investigators discovered that his scheme was not based on post reply paid coupons at all, but was a pyramid selling scheme which paid out profits by obtaining more new investors. The scheme quickly collapsed with investors losing almost everything and Ponzi was jailed.

Property booms often start out in the same way that Ponzi’s scheme did, based on genuine demand for housing in which investors can participate. They can also turn into bubbles created by speculative demand from investors in which renters and home buyers no longer take part, and so they turn into Ponzis.

Speculative booms begin like pyramids, with the number of investors buying property much greater than those who want to sell.

The increasing demand pushes prices up and creates more buyer demand, which then pushes prices up further.

The pyramid quickly turns turtle when the number of investors trying to sell starts to exceed the number wanting to buy. This causes prices to fall, and so more investors want to sell.

Prices can then crash when virtually every investor is trying to sell and none want to buy.

This type of crash only occurs in markets controlled by investors because unlike home buyers, they don’t live in the properties they own.

It’s encouraging to know that the stability of the property market comes from the fact that most property buyers are not investors at all, but owner-occupiers who are not seeking cash flow or price growth, but a secure home to live in.

This is why the only areas of our property markets that can experience such Ponzi type crashes are those where investors own most of the properties, and even then a crash can only occur if the demand for properties is purely speculative and not underwritten by a genuine need for housing.

Posted on September 23, 2021September 24, 2021 by John Lindeman

Sinister secrets and celebrity suburbs

John Lindeman reveals whether headline grabbing horror stories about murders or riots steer potential property buyers away from some suburbs, and if the “celebrity effect” really does improve buyer demand in others.

In late 2005, thousands of angry, alcohol fuelled rioters engaged in an orgy of assaults and violence now known as the “Cronulla Riots”.

It was widely considered that these acts of mob violence and property damage would have an immediate impact on the local housing market.

The graph shows that Cronulla’s house prices have usually mirrored those of Sydney as a whole, but what occurred after the riots was totally unexpected.

As the red arrow shows, house prices in Cronulla rose at a higher rate for two years after the riots when compared to the rest of Sydney.

In other words, there was no downward impact on house prices in Cronulla at all, and it’s much the same story in many suburbs which have witnessed bizarre or even horrendous acts.

When a mother murdered eight children in the inner Cairns suburb of Manoora in 2014, local agents believed that property prices would nosedive as a result. However horrific this event was, it had no effect on Manoora house prices when compared to other nearby Cairns suburbs. Manoora became one of Cairns’ best performers in the following years.

Bodies found in barrels

Snowtown is located about 100 km north of Adelaide, and hit the headlines for all the wrong reasons back in the late nineties when eleven dismembered bodies were found in the town’s disused bank vault. The corpses of the butchered victims had been hidden there in barrels by the murderers and so they quickly became known as the “bodies in barrels” murders.

But despite, or possibly even because of the bizarre nature of these murders, the town’s economy boomed as tourists flocked to visit the scene of the grisly crimes.

Even now, tourists stopping at Snowtown are able to purchase a range of bizarre souvenirs when they visit.

The evidence shows that while there may be some lasting stigma attached to the property or the street where a horrendous event previously occurred, this does not extend to the suburb as a whole, and neither buyer nor renter demand is impacted.

Buying for bragging rights

Imagine the excitement of living next door to a well-known celebrity or in the same unit block as a famous actor or sporting legend.

You may even be convinced that housing prices in the vicinity will lift due to the demand that the presence of a famous person could generate, not to mention the “bragging rights”.

While you may be popular at barbecues and parties where you willingly reveal insider stories about your famous neighbours, any effect on housing demand is usually grossly overrated. This is because most celebrities value their privacy, and may even move away when they discover neighbours peering through their windows at night, or secretly inspecting the contents of their rubbish bin.

Adding a layer of attractiveness

Other celebrities may actively promote the desirability of living in their suburb. Rick Stein’s famous restaurant at Bannister’s in Mollymook certainly adds to the appeal of living in this picturesque Southern New South Wales coastal town.

Already indulged with over a dozen restaurants, a spa and championship golf course, locals can enjoy the majestic views of Mollymook beach while dining on Rick Stein’s famous seafood dishes. It’s hardly surprising, then that Mollymook’s house prices are the highest in the Shoalhaven region.

Why do famous people favour such locations? It’s because they are already sought after, especially by the well-heeled. Rather than creating appeal, the presence of famous people simply adds to the existing attractiveness of an area.

In Byron Bay, the “Chris Hemsworth effect” has added an extra layer of desirability to living in this already idyllic location as buyer demand has pushed the median house price to an incredible $2.5 million. Tamborine Mountain on Queensland’s Scenic Rim is home to famous rich listers such as Hugh Jackman, while Mount Macedon in Victoria has played host to former US Secretary of State Colin Powell and celebrities such as Nicolas Cage and Ed Sheeran. Median house prices in both locations are higher than in their nearby capital cities.

Yet, celebrities can only add to an area’s appeal, not create it, so it is always important to look beyond the benefits of living in celebrity suburbs or the supposed impact of those with sinister secrets and do your research to discover the actual causes of buyer demand in any market.

Posted on August 17, 2021August 17, 2021 by John Lindeman

Brace for the big baby boom

Many believed that recurring lockdowns and working from home restrictions would lead to a baby boom, but it’s not in sight – yet. John Lindeman explains why, and what’s around the corner.

It seems natural that periodically locking down couples at home and closing public entertainment and recreation facilities would lead to more babies being born, but according to the stats, our birth-rate is falling, and the rate of decline has recently worsened.

As this graph shows, the drop in our fertility rate has accelerated as fewer women choose to have babies.

The reason for this decline is that people tend to put off having babies during uncertain times. Birth-rates drop during recessions, famines, wars and periods of economic, social or political turmoil, and that’s precisely where we are right now.

You can see in these two graphs how the same trend played out during the last periods of unrest and uncertainty that our nation experienced – the two World Wars.

Most of our population growth in the years before the First and Second World Wars came from births, but as the war years went on fewer couples decided to have babies, even though the opportunities to do were still there, especially when soldiers periodically returned home on leave.

Birth rates fall during times of crisis

This trend was very similar to the current decline. Although people may have more opportunities than ever to make babies, they are not motivated to do so, deciding that it’s better to wait until conditions improve.

Everyone hopes that the current crisis will not be as severe or last as long as those wars did. Although there are no guns or bombs to contend with, and the enemy comes in the form of a tiny virus, the result is much the same – fewer people are having babies.

The real question is what occurred after each of world wars, when all that uncertainty and inaction was replaced by optimism and enthusiasm? And the answer is that we had huge baby booms.

After each war ended, people started having babies in larger numbers than ever before, and the population growth rate reached record levels.

An entire generation of Australians, now known as baby boomers. was born as households swelled in size to include three, four or even more children.

This crisis will be overcome

Past pandemics have always been conquered, whether by strict immunisation protocols or the development of new, more powerful vaccines. The Spanish flu pandemic caused an estimated twenty to fifty million deaths worldwide from 1917 to 1920, but now we accept one annual flu shot as an adequate defence against all forms of influenza.

Another virus, called poliomyelitis killed over one thousand Aussie children in the post war years and tens of thousands were left permanently paralysed. Not only was an effective Salk vaccine developed in the 1950’s, but the improved Sabin version is now administered orally, on a spoon or a sugar cube. There’s no need for a needle, and Australia has been officially polio free since 2000.

We have nothing to fear and everything to hope for regarding the future as far as COVID-19 is concerned as well. When the virus is finally behind us and confidence returns, we are very likely to experience another baby boom, just as we did when those past crises ended.

The baby boom could lead to a housing boom

The graphs show that Australian capital city house prices rose by over fifty per cent in the four years after the First World War ended, as our population growth rate soared. In the six years following the end of the Second World War, house prices shot up by an incredible one hundred and seventy per cent as the demand for housing dramatically increased.

Not only were people having more babies, but we also welcomed refugees and migrants from war ravaged and economically devasted countries, resulting in the highest population growth rates we have ever experienced as a nation, before or since.

What this analysis is telling us is that when all the current uncertainty is finally over, another baby boom will begin and large numbers of overseas arrivals will migrate here as well. Then we can confidently expect the housing market to boom again as well.

Sources

Federal Government Centre for Population
A century of population change in Australia, Australian Yearbook 2001
Time Series Profiles, Australian Bureau of Statistics
Australian National Library Trove facility and Mitchell Library archives
House Price Indexes: Eight Capital Cities, 6416.0 Australian Bureau of Statistics
Housing Market Prediction Solution, Property Power Partners
Mastering the Australian Housing Market, John Lindeman, Wileys

Posted on August 4, 2021August 5, 2021 by John Lindeman

The Brisbane Games and property prices

We can expect many webinars, blogs, even free reports about how the Brisbane Games will turbocharge the housing market. To sort out the fantasy from the facts, property market analyst John Lindeman explains what effects the Brisbane Olympic Games could have on property prices.

After the current Olympics conclude, we’ll have the Paris Olympics in 2024 and then the Los Angeles Games in 2028. The Brisbane Olympics are a long eleven years away, but could the local property market be heading for some big changes well before construction begins, ticket sales open and spectators start arriving?

We can find the answers by looking at what took place in the Gold Coast property market as a result of the Commonwealth Games held there in April 2018.

After the completion of specially built and improved sporting, transport and accommodation venues, the economy was boosted by the arrival of local, interstate and overseas visitors. So ,what changes occurred to the property market before, during and after the Games?

Before the Games – massive infrastructure projects

Getting the Gold Coast ready for the games involved massive spending on new infrastructure, such as improving and constructing sporting centres and building the G-Link light rail to provide easy access to the venues. This naturally led to a rise in the number of construction workers, but did this then also lead to an increase in housing demand?

The facts are that most infrastructure projects do not increase housing demand at all – they create demand which is directly related to their purpose – hospitals for sick people, universities for students, shopping centres for shoppers, sporting events for spectators.

Infrastructure projects carried out in remote or captive markets tend to increase demand for rental accommodation from workers, because they need to relocate there while construction is in progress. This is not the case in major cities, because the construction work is largely carried out by local contractors who already live in the area.

This is what occurred during construction of the facilities for the Commonwealth Games, with extra workers from Brisbane and other nearby population centres commuting to and from home, rather than renting locally during the construction phase. As a result, there was little to no rise in rental or home buyer demand during the years prior to the Games.

The projects did, however, cause some disruption to retail and commercial business, especially with the building of the G-Link light rail disrupting the centre of popular tourist precincts such as Southport, Main Beach and Surfers Paradise.

In those areas, noise, dust and road closures had a negative impact on both retail and residential housing demand.

During the Games – huge boost to tourism

Over one million interstate and overseas visitors attended the Commonwealth Games, and gave the local tourist industry a huge shot in the arm. The accommodation and tourist industry such as hotels, motels, entertainment facilities, restaurants and specialist retail shops all benefitted, although the rise in demand was only temporary.

As the increase in demand was for short stay accommodation, it did not ripple through to the housing market, except for a temporary rise in accommodation services such as Airbnb.

After the Games – better facilities and more tourism

The legacy of the Games has been improved and specially built sporting venues and of course, the G-Link light rail which is gradually being extended all the way to the NSW border. There was also a rise in international tourism to the Gold Coast, especially from Commonwealth countries in 2018-19, but this quickly dissipated after the outbreak of the COVID-19 pandemic.

When looking at what effect, if any, that all this activity may have had on the local property market before, during and after the Games, it is important to realise that there are two different types of property and that they can behave very differently from each other at such times.

The Games had no effect on the Gold Coast house market

With well over half a million residents and two hundred thousand dwellings, the Gold Coast is the sixth biggest city in Australia, but what makes it unique is that one quarter of the city’s dwellings are units. As the graph shows, these two markets performed very differently in the years leading up to the Commonwealth Games.

Gold Coast house prices dipped slightly after the Global Financial Crisis (GFC) in 2008, but then rose slowly until another small price correction occurred as a result of the social and economic uncertainty caused by the COVID-19 pandemic.

The data shows that the Games had no apparent effect on the rate of house price growth or any other measurable impact on the Gold Coast house market.

The Games had a big effect on the Gold Coast unit market

The unit market had a very different experience. The graph shows that the Gold Coast unit market entered a sustained period of price decline after the GFC, when it was abandoned by overseas and local investors. Confidence and buyer demand returned after 2013-14, with the unit market even experiencing a mini-boom, but even so prices have only just returned to their pre GFC levels.

This graph shows how unit prices fluctuated before, during and immediately after the Commonwealth Games. Unlike houses, where there was no noticeable effect on prices, unit values rose steadily in the lead up to the Games, creating a bubble, bursting when the Games were over.

This picture is typical of speculative investor booms when they become bubbles and then burst when the incentive to buy property stops.

The reason that this took place in the Gold Coast unit market and did not affect house prices is because units are ideally suited to speculative investment. They can be sold off the plan in large numbers well before construction even starts and promoted to overseas and local investors with generous rental guarantees coupled with assurances of rapid and imminent price growth.

Who made a profit from the Gold Coast unit market boom?

Did any property investors profit from the Games? The data shows that unit prices on the Gold Coast, especially in suburbs such as Currumbin Waters and Burleigh Waters rose by fifty percent and more in the few years before the Games were held, so some profit taking was likely.

Based on this experience, it is possible that such a speculative bubble could form again in the lead up to the Brisbane Games in some of the city’s unit markets, but it is unlikely to have any impact on house prices.

Could investors make a profit from the Brisbane Olympics?

There will undoubtedly be a rise in speculative investment in the lead up to the Olympic Games, and unit developments are the obvious candidates. As new unit developments located near proposed Games venues are announced, speculators will quickly purchase the first available off the plan. They will then watch and wait as both local and overseas investor interest rises with the new developments being sold internationally.

Project marketers and sellers’ agents will promote them at free events and seminars with low deposit bonds and attractive rental guarantees using the glitz and glamour of the coming Olympic Games to motivate and entice purchasers.

Using the 2018 Commonwealth Games unit market experience as a guide, we can expect informed speculative investors who have purchased units a few years before the Olympic Games to offload them just before the Games begin. They will try to time their selling point just when excitement is at fever pitch and prices are at their peak.

It seems highly likely that the only real changes to the Brisbane property market caused by the Olympic Games will be from speculation. The trick will be knowing what to buy, when to buy, where to buy and most critically, when to sell. If this opportunity seems tempting, remember that the possible gain from property speculation may not outweigh the obvious potential for loss, and of course, there may be much better property investment opportunities with less risk to be found elsewhere.

Posted on July 11, 2021July 11, 2021 by John Lindeman

Timing versus time in the market

Some property market experts and analysts promote a buy and hold strategy, called “time in the market” and others advocate a buy and sell strategy known as “timing the market”.

But sometimes, the same experts will switch from one strategy to the other. For example, early last year, when most experts expected a pandemic induced property market downturn, the call was no, you can’t time the market, but now that the market is booming, that’s all changed to yes, you can time the market.

Does this mean that you can time the market at some times, but not at others? Or is there something else going on? To find out, let’s look at how these two very different investment strategies are presented.

Time in the market means buy and hold

Experts promoting time in the market claim that investing in property is a long term strategy. They’ll say that it’s difficult if not impossible to predict imminent changes, and even if growth stops for a while it doesn’t really matter, because prices always go up over time.

In fact, they’ll assure you that prices double every eight to ten years, so you can use the power of compounding growth to accumulate wealth over long periods of time.

This approach means that it’s always a good time to buy and then rely on time in the market to watch your equity grow.

Experts pushing timing the market claim that buying for imminent growth and avoiding downturns is much more profitable than buying and holding for the long haul, because property market performance is predictable, even in the short term.

They forecast the imminent future with tools such as the property clock or the property market cycle to reveal when and where the market is moving into a growth phase, and prices will soon rise.

They say that timing the market enables you to buy at the right time and in the best location to ride the next wave of price growth.

So, which strategy achieves the best results?

It would seem that timing the market works best when we know which way prices are heading, and that time in the market is safer when we don’t know what is around the corner, but this misses the point.

Achieving average market driven growth with the same property over many years is nowhere near as profitable as buying for high growth and selling when the growth wave has passed.

This means that timing the market will always be the most successful strategy to achieve wealth from property, as long as we know how to find those locations with the best imminent price growth potential.

Posted on June 23, 2021June 23, 2021 by John Lindeman

Cash flow booms are coming

The closing of our national borders to overseas arrivals is impacting population growth in some States and Territories, but is also causing cash flow booms for property investors in others. John Lindeman reveals where to find them.

It’s understandable that much of the focus on international border closures caused by the pandemic has been negative, because lower population growth ultimately means less demand for housing. For example, we know that housing demand in locations where overseas students, tourists and migrants were renting prior to the pandemic has been hit hard, especially in Melbourne’s inner urban unit market.

But, looking at the positive side, the latest ABS data indicates that population growth in States and Territories less reliant on overseas arrivals has been quite strong, as Figure 1 shows.

Since our national borders were closed early in 2020, Queensland’s population has grown more than any other State with a net increase of 68,200 residents over the last year. The State’s annual population growth rate of 1.3% is now the highest of all our States.

Victoria, on the other hand, which had the largest increase in population before borders were closed, has slipped back to third spot, and its annual population growth rate of just 0.7% has fallen below that of most other States.

This dramatic change is mainly due to the collapse of overseas migrant arrival numbers, especially to States such as New South Wales and Victoria. but a significant number of people are also relocating from the southern States to Queensland.

Nearly half of Queensland’s new residents relocated from New South Wales and Victoria, meaning that their loss was Queensland’s gain. This new trend is likely to continue until well after our international borders re-open as the popularity of our major population centres undergoes a significant realignment.

In years gone by, Queensland was a popular retiree destination, but we are now seeing large numbers of young people moving there. Many of them are recent immigrants who have decided to move once again. They don’t have the personal, family or workplace ties that deter people from relocating and they are attracted to Queensland’s climate, recreational lifestyle, employment opportunities and cheaper housing costs.

Most of Queensland’s new households are renters

The significance of these numbers for property investors is that most of the new households are renters. Figure 2 shows that rental demand is growing in all our State and Territories, with the numbers of new renting households in New South Wales and Victoria being higher than other States purely because they are the biggest State in terms of population. The real show stopper is Queensland, because rental demand there is rising far more strongly than in the other States.

These numbers become more significant for property investors when we also look at the supply of rental properties, that is, the number of advertised rental vacancies in each State and Territory. I have done this in Figure 3, which shows that both New South Wales and Victoria are well out in front in terms of rental vacancies.

Rental vacancies are created when tenants move out, or when investors buy newly built or owner-occupied properties. To compare the overall rental demand to the available supply, we can use the population growth figures provided by the ABS and compare them to the number of rental vacancies in each State and Territory. I have done this in Figure 4, which reveals the States and Territories where rents are likely to rise and those where they may fall.

The comparison reveals that Queensland has a huge undersupply of rental properties compared to the demand for them, followed by Western Australia, South Australia, New South Wales and the other State and Territories. Victoria is the only State with an overhang of rental vacancies.

This “top down” type of analysis indicates where asking rents are likely to rise and fall until our national borders are open again, but only in very general terms. There could be locations in Victoria with rental shortages, just as there could be some suburbs in Queensland with high numbers of rental vacancies compared to the demand. Even so, rents are much more likely to rise in Queensland and Western Australia than they are in the other States and Territories.

Posted on May 31, 2021May 31, 2021 by John Lindeman

When the boom is over

We all know that all property booms eventually come to an end, so what will happen to property prices when the current boom is over?

Property booms don’t all finish in the same way. Booms where investors have been heavily involved can become superheated bubbles and then they bust, with prices crashing. In fact, as price growth comes to an end, we can expect the usual dire warnings of an imminent property market crash to make headlines in the media.

The current boom, however, has been caused by home buyers rather than investors, so does this mean that growth will eventually slow down when demand falls? Can we expect prices to stabilise rather than crash and then look forward to price booms in other locations?

The best way to forecast what might happen to property prices is to look back to past property market booms which were generated by home buyers rather than investors, and see what took place when they ended. These booms occurred after the end of World War One, the end of World War Two and before the GFC.

How the biggest property market booms of the past ended

When the First World War ended in 1919, large numbers of soldiers returned home to start families, followed by migrants and refugees fleeing war torn and ravaged Europe.

The demand for housing resulted in severe shortages and house prices rose by over fifty per cent in a few years, as the graph shows.

The same situation developed again after the Second World War ended in 1945, and for the same reasons, as soldiers returned home and huge numbers of migrants and refugees arrived, resulting in housing shortages.

This was our biggest boom ever, with house prices almost trebling in just five years.

The third home buyer boom took place after the Federal Government’s introduction of the First Home Owner Grant in 2000, and continued until the Global Financial Crisis in 2009.

During this boom, house prices doubled in less than seven years.

Apart from the massive increases in prices that took place, each of these graphs also shows us that when the housing market booms ended, prices did actually fall.

The price falls, however, were quite small, only decreasing by around five percent at the end of each boom and more significantly, the market then recovered after each correction had occurred and moderate price growth returned.

Why do all home buyer booms end?

Big home buyer booms finish for a number of reasons. Price growth can stop when new property development eventually catches up to buyer demand, and the newly released stock results in temporary oversupplies.

Sometimes house prices have risen so much that potential buyers simply can’t afford them anymore, and some booms end because the number of potential buyers has been exhausted and there’s no more buyer demand.

Why do prices fall when home buyer booms end?

Just before booms end, potential buyers are frantically competing to snap up the few properties for sale on the market. These are often bought at prices well above market value, which would be fine if buyer demand continued, but as the boom ends, the value of these homes can fall below what the new owners have paid.

This wouldn’t matter if the last purchasers in a boom could hang on to their homes until growth returned, but sometimes that isn’t possible.

Many new owners decide to renovate or make other home improvements and most first home buyers need to splash out on whitegoods, floor covering and furniture. This additional expenditure increases their debt levels and may impact the capacity of some new owners to service the loan.

Others may be forced to sell because of work relocation, unemployment, or relationship and family issues.

This leads to an increase in unexpected or even forced home sales at the end of a boom just when the number of buyers has decreased and causes prices to fall. Such crisis induced sales only last for a number of months, as most new home owners are reluctant to sell and try to hang on to their homes until their situation improves.

As the above graphs show, the net result has always been a small correction in house prices of around five percent over the twelve months that follow the end of a boom. There is no reason to believe that this boom will end differently.

Why does price growth usually return?

Once these small corrections have occurred and our big city post-boom markets have stabilised, they usually enter a period of subdued but constant growth which can last for years. This is because the demand for housing in our major urban centres has always outpaced the supply, being driven by the constant arrival of new households from overseas, with each household requiring their own home to live in.

With our border firmly shut, population growth now comes only from new babies, who don’t increase the demand for housing as much as for more bedrooms.

This means that until overseas migrants are able to resettle here again, our property markets may enter an extended period of little to no growth.

This is of course, apart from areas where people are likely to relocate in a different part of their State, or from one State to another, because this creates more housing demand in the process. It is those locations which will have potential to outperform the overall market over the next few years.

Sources:

CoreLogic published housing data
Australian National Library Trove facility and Mitchell Library archives
House Price Indexes: Eight Capital Cities, 6416.0 Australian Bureau of Statistics
Housing Market Prediction Solution, Property Power Partners
Mastering the Australian Housing Market, John Lindeman, Wileys
Stapledon’s Index: Long Term Housing Prices in Australia, Nigel Stapledon, University of NSW